What Once Was Old May Be New Again: 'Cash Out' Refis

Homebuyers who are currently seeking to refinance their mortgage as interest rates rise may be doing so to "cash out," rather than lower their monthly payments.

The term “cashing out” is in reference to the practice of taking out a new mortgage, larger than the remaining balance on the original loan, and using the difference for "discretionary purchases," writes Andrea Riquier at Realtor.com. According to Freddie Mac data, the share of cash-out refis were at their highest level since 2008 as of Q4 2017. Riquier points out that it is currently hard to discern whether or not these refis are truly rising, given that traditional refis are plunging with interest rate increases.

The challenge will be making sure that the new wave of equity cash-outs isn’t like the one that helped torpedo the financial system a decade ago. (The Urban Institute and others have shown that refinancing activity, not home buying, was responsible for inflating the housing bubble.) In the last go-around, many homeowners “blew the money,” in Sharga’s words, on splashy purchases like vacations and boats. But lenders were complicit too, offering loans that were as much as 120 percent of the existing value of the home.

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